Tax-Free Gift to Great Grandchild’s Future (Investing in a 529 Plan)
I recently had the pleasure of opening two 529 plans. One for a client’s grandchild and another for a client’s great grandchild. These clients are using the 529 plans to gift to their heirs in a tax efficient manner. When distributions from the 529 plans are used for qualified education expenses, the gains are federally tax free. And given, the earnings won’t be used for another 18-22 years, that could be a great deal of earnings.
Additionally, while the funds are in the 529 plans, they are totally controlled by the owners, my clients. My clients can change the beneficiaries if they need or want to. Or they can bring the funds back into their estate (with a penalty) if need be. As long as the contributions are below the annual gift exclusion, there are no estate tax or gift tax issues. In fact, you can front load five years of annual exclusions into your 529 plan. That’s a $70k jump start!
Yet, while the funds are totally controlled by my clients (the owners), the assets are considered outside of their estate for estate tax purposes. While this may not mean much to most tax payers given the recent estate law changes, it means something to my clients. They have total control over sizable assets that are not part of their estate. This is very rare and valuable—to those that are concerned about such things.
Most of the 529 plan assets I manage are managed on behalf of parents. The parents are regularly setting money aside for their children’s future college needs. Because parents do this for their children, they are allowing investment gains help offset some of the future education expenses. Not only are they saving for the future, they are also investing for the future. And, because they are investing in a 529 plan, those gains will be tax free.
There are some alternatives to investing for college; Coverdell accounts, Roth IRAs, Custodial accounts, etc… However, the 529 plans for several reasons are considered by many a better way to invest for your student’s future qualified education expenses. Review the differences here between the two main tax-free options.
All states have 529 plans. My state (the Commonwealth of Virginia) has several options that could be discussed in future posts; 529 American Funds, Virginia Managed 529 plans, Prepaid college, and an FDIC savings plan. Which is best for you? I don’t know. You need to do your research or hire a professional. The various plans are complicated. They each have their own rules. Investments are risky. The performance and fees vary considerably. There are tax, estate, and financial aid implications you should be aware of.
Start your research now at the SavingforCollege website. And then open an account for your student—child, grandchild, or great grandchild. What a legacy you’ll leave!!
Do good, Dan